March 31, 2006

Gold and the Depression

Most economists argue that the Great Depression of the 1930s was the single biggest economic disaster in the country. N.C. State University’s Mike Walden takes a look at what U.S. Federal Reserve Chairman Ben Bernanke has to say about what contributed to that crisis.

Bernanke is “the author of one of the best books, I think on the Great Depression,” says Walden, an economist with North Carolina Cooperative Extension. “And in this book … he argues that some of the blame for the Great Depression can be put on the gold standard.

“He says -- and he has research to back this up -- that countries that were on the gold standard actually suffered more during the Great Depression. The reason is that the gold standard inhibited the expansion of the money supply in those countries, and one of the big factors behind the Great Depression was simply the lack of monetary growth -- the lack of money growth in countries.

“So he argues that really the gold standard put a constriction -- put handcuffs, if you will -- on the ability of central bankers to try inflate the country out of the Great Depression,” Walden adds. “And, indeed, I think he would argue this is the reason perhaps for not going back to the gold standard.”

March 30, 2006

Fiscal illusion

To economists, money is a key measuring rod for resources. But there can be problems in comparing money amounts. N.C. State University’s Mike Walden explains fiscal illusion, one of those problems.

“It simply means being fooled by money amounts,” he says. “Let me give you two examples: Let’s say that you hear that your grandfather earned only $10,000 a year 40 years ago, and you are earning -- I don’t know -- $40,000 or $50,000 today.

“You might think, ‘Well, gee. I’m earning much more than my grandfather; he only earned $10,000.’

“But think about the fact that prices were a lot lower back 40 or 50 years ago when you grandfather had that $10,000,” says Dr. Walden, an economist with North Carolina Cooperative Extension. “Fiscal illusion would be being fooled into thinking $10,000 is like $10,000 today. It’s not.

“Or another example is when we are looking at big dollar amounts -- particularly governmental budgets,” he adds. “Let’s say the federal budget deficit: $400 billion a year. That’s certainly a big number, and people like to say how large it is and how significant it is.

“But you have to put that in the context of the economy. And when you do put it in the context of the economy it amounts to about 3.5% of our entire economy.

March 29, 2006

Should you avoid a tax refund?

Many people look forward to receiving a tax refund. But, as N.C. State University’s Mike Walden explains, some economists say getting a tax refund is a bad idea.

“This is a point that economists make every year at this time, but it is worth repeating,” says Dr. Walden, an economist with North Carolina Cooperative Extension. “That is, when you get a tax refund that means you have had too much money withheld from your paycheck for federal income taxes -- meaning that even though you get that money back the government has had use of that money for an entire year and -- this is the important part -- they don’t pay interest on using that money.

“Let’s say you get $1,000 back,” he says. “You’ve lost use of that 1,000 for the greater part of a year and you’ve not earned any interest on it.

“So what economists argue is that it is better to gauge your withholding to give you a zero refund and of course you can do that by trying to work with your employer in terms of adjusting the amount you have had withheld.

“Just remember if you get a refund, you’ve actually loaned the government money interest free.”

March 28, 2006

Compliance costs

It’s tax time again, and when most people think about taxes they consider how much they will either have to pay or get back. But, as N.C. State University economist Mike Walden explains, there are other significant costs associated with filing tax returns.

“There’s the time that we have to spend in gathering tax information. This is a particularly costly thing for businesses. And, of course, there’s the dollar cost that many people and businesses expend when they have someone prepare their taxes,” says Walden, a specialist with North Carolina Cooperative Extension.

“These are broadly called compliance costs, and they are not an insignificant amount,” he adds. “In fact, it is currently estimated that those compliance costs amount to $265 billion a year and within 10 years that could rise to $500 billion.

“And this is one reason why some say we need to simplify the tax code,” Walden concludes, “because if we did so that would probably bring those compliance costs down.”

March 27, 2006

Minimum wage workers

There’s discussion in North Carolina about raising the minimum wage, and N.C. State University economist Mike Walden says workers making that wage are a distinct group.

“The majority of them are not prime age workers with families," says Dr. Walden, an economist with North Carolina Cooperative Extension. "Instead, the majority are teenagers and young workers under the age of 24 who are primarily in entry level jobs.

"Also most of them are working part-time, and studies show that within a year they move into a higher paying job.

"So when we talk about minimum-wage workers, I think the image is of a person who is trying to support a family on 5.15 an hour," he concludes. "That’s just not the case."

March 24, 2006

Can we end our addiction to oil?

In his State of the Union address, President Bush said we must end our addiction to foreign oil. But N.C. State University economist Mike Walden says it won’t be easy.

“Despite the higher price of gasoline that we see today, it is still the cheapest fuel,” says Dr. Walden, a specialist with North Carolina Cooperative Extension. “Now, that said, some people say that gasoline is actually underpriced because it doesn’t account for the cost of pollution that is created when we use gasoline and also the national security implications.

“And some say that what we need to do to make energy alternatives more attractive is perhaps to add maybe $1 or $1.50 in an additional tax per gallon of gasoline.

“But even if we did that even if we did that, the estimates are that it would reduce our importing oil only 15 percent,” Walden adds.

“So we are not going to end our use of foreign oil anytime soon,” he concludes. “It’s going to be a very long-run proposition.”

March 23, 2006

The aging workforce

Through demographics, we can fairly precisely predict how many people there will be in future years in various age groups. And by examining these age projections, we can see important trends for the workforce, says N.C. State University economist Mike Walden.

“We are going to be a very straightforward aging workforce. And many companies are going to have to turn to older workers to survive," says Dr. Walden, a North Carolina Cooperative Extension specialist.

“Just look at these numbers: The number of workers between the ages of 35 and 44 actually going to decline this decade -- fewer number in that age category. And the number of workers under age 35 is going to increase less than 10 percent.

"In contrast the number of workers between 55 and 64 is going to increase 50 percent, and the number of workers over age 65 will go up by 30 percent," he adds.

"So just in terms of raw numbers, businesses are going to have ... to look to older workers simply to survive.”

March 22, 2006

Inflation worries

The January retail inflation rate was brutal, with prices rising at an annual rate of almost 8 percent. But N.C. State University economist Mike Walden doesn't think we are headed for a period of hyperinflation.

"The January numbers certainly were high -- there’s no way you can get around that," says Dr. Walden, a North Carolina Cooperative Extension specialist. "But if you look at details, most of this was again due to energy and particularly gas prices.

"Gas prices went up in January. If you strip out gas prices and some other volatile components, you see that inflation rose at a much more modest annual rate of 2.5 percent," he adds. "I think what this suggests again is that we don’t have a broad-based inflation problem in the country; instead we have an energy price problem.

"The important thing I think is that higher energy prices have not bled over into other prices -- at least yet," he concludes.

March 21, 2006

Paying for college

With college educations becoming increasingly important in today’s job market, more young people are faced with the question of how to pay the substantial costs. N.C. State University economist Mike Walden says, “There’s no question that it’s become a little harder for students.”

“In fact, the average student now finishes his or her college career with between $15,000 and $20,000 in loans,” says Walden, a North Carolina Cooperative Extension specialist. “The student loan market has exploded. It’s now $80 billion a year, and that’s doubled over the past 10 years.

“Now, three quarters of this debt is from either direct federal loans or federally backed loans, so the federal government has a big part of this,” he adds. “But the fastest-growing component of the student loan market is actually private loans.

“They were almost nonexistent 10 years ago. They now account for $15 billion of college debt,” he says. “But I should say that even with these loans -- even with these debts -- all the numbers show that college is still a worthwhile investment.”

March 20, 2006

Are the young getting ahead?

Several recently published books discuss how tough young adults have it in today’s economy, given the high costs of college, an unstable job market and large amounts of debt. But N.C. State University economist Mike Walden says that there is another side of the story.

“Let’s look at the data. The authors of these books who say that young households are having it tough do have a point if you look at income gains. ... We are defining young households here as people under the age of 35. They did make income gains in the 1990s, but they have actually seen their income fall back in this decade of the 2000s,” explains Walden, a North Carolina Cooperative Extension specialist. “So that paints a gloomy picture.

“But actually a better picture is painted if you look at net worth, which is simply the difference between the assets of young households and their debt,” he adds. “Federal Reserve data show that actually the net worth of people under the age of 35 dipped in the mid 1990s, but has actually risen since 1998.

“So this is really good news, and what it says is that on the income side young people may be having a tough time, but on the asset side they are actually making gains.

“And indeed with all their additional expenses that we talked about, those gains, I think, are all the more impressive.”

March 17, 2006

Are we doing better?

Every three years the federal reserve takes stock of the financial situation of American households by issuing the survey of consumer finances. N.C. State University economist Mike Walden says that the recently released survey, for 2001-2004, included both good and bad news.

“As in most of these surveys ... you have good news and bad news,” says Walden, a specialist with North Carolina Cooperative Extension.

“The good news is that median income for the average household did indeed go up, as did median net worth.

“The bad news, however, is that income fell for about half of the income categories, and net worth fell for the lowest income categories,” he adds.

“Also even though I indicated that the average household made income gains over the last three years, those gains were at a much slower rate than we saw for the 1998-2001 period.

“So I think you can say that we’ve had mixed results, mixed gains.

“Of course you should put this in perspective: We did have the 2001 recession and the very slow recovery,” he notes. “So we really I think have to wait ‘til the next survey which takes place during a period of economic expansion to get a better view on how we are doing.”

March 16, 2006

Knowledge investments

When most of us think of investments, we think of putting money in the stock market or mutual funds. Or we think of a business building a new factory or getting new equipment. But Dr. Mike Walden, an N.C. State University economist, says that it may be time to rethink that definition.

"When we are trying to track our economy and ask, 'How much are we really investing?' one of the problems is that the definition of what an investment is and the statistics developed for tracking them were developed 70 years ago, when the economy was much different," says Walden, a specialist with North Carolina Cooperative Extension.

"Clearly an investment is something like investing in a new building or equipment. But what about software? Under those rules developed 70 years ago, of course, software didn't exist. So a business buying software today -- that's not included as an investment. Yet clearly it is.

"Or what about education? We all know that people need to get more education to get ahead in this economy. So if you spend money on education, shouldn't we really count that as an investment?" Walden adds.

"Fortunately people -- economists both in and outside government -- are thinking about this. And actually the government's rules about what are investments -- those rules are changing," he says. "And what we'd expect to see when those new rules come out: We are going to see that our economy is actually investing much, much more than we previously thought."

March 15, 2006

A dose of reality in investing

We often hear examples of tremendous gains in investment markets, like the stock market, over long periods of time. For example, it’s been said that $1,000 invested in the stock market in 1926 would be worth almost $2.7 million today, even given all the ups and downs the market has experienced. While such statements may be true, N.C. State University economist Mike Walden says they leave out two key considerations.

“First thing is they leave out inflation,” says Dr. Walden, a specialist with the North Carolina Cooperative Extension Service. “That $2.7 million is in terms of current dollars, and it’s not been adjusted for inflation.

“And, indeed, if you did adjust those dollars for inflation, [to] be comparable to what the $1,000 could buy back in 1926, that $2.7 million would actually be worth $46,000 -- you’ve still gained but not nearly as much.

“So it’s very, very important when you are looking at these long-run gains in investing, you have to account for inflation.

“You also have to account for taxes paid. That can take out anywhere from maybe 20 percent to as much as a third of your investment return.

“And so what I would argue to people is when they are looking at these kinds of comparisons or when they are working with an investment professional, they always need to keep inflation and taxes in mind.”

March 14, 2006

Savings ratios

Most people don’t devote a lot of time to their personal financial planning, even though such planning is important. Instead, they look for shortcuts or rules of thumb to help guide their financial futures. Dr. Mike Walden, an N.C. State University economist, considers one such guide for retirement savings.

“Because people are busy ... they just can’t do all the crazy calculations that an economist or an accountant do,” says Walden, a specialist with the North Carolina Cooperative Extension Service. “So I have to give credit to this person, a financial planner in the country named Charles Farrell [who] recently published I think some very easy rules for retirement planning.

“What he did is he developed multiples of your annual income that you need to have in a savings account targeted toward your retirement,” Walden says. “For example, he says at age 35 you should have savings equal to 90 percent of your income targeted toward retirement.

“At age 45 that savings should have increased to three times your income, and at age 55 it should be six and a half times your income.

“Now this assumes you have no other source of savings other than Social Security for your retirement. He says if you have a company pension, what you need to do is to subtract that annual pension first from your annual income, then develop and apply the multiples.”

March 13, 2006

The old versus new economy

There was a time when the North Carolina economy was dominated by the tobacco, textiles, apparel and furniture industries, but their relative importance has declined in recent decades. N.C. State University's Mike Walden looks at the industries that have taken their places.

"People used to call of course tobacco, textiles and apparel together, and furniture, they would call them the big three," says Dr. Walden, a professor and extension specialist with the Department of Agricultural and Resource Economics.

"And their relative importance certainly has gone down. It's been cut about in half over the past 30 years.

"What they've been replaced by some people call the new big five. And the big five would include technology, pharmaceuticals, food processing, financial services and vehicle parts.

"You take those five industries in North Carolina together -- their relative importance has actually doubled over the last 30 years.

"So it's really been the growth there that has countered the decline of the old big three," Walden concludes. "And I think this again is indicative of our changing economy, but it also says that there will be new jobs -- there will be these new economic kids on the block -- for North Carolina.

"But clearly they are going to be different than they were in the past."

March 10, 2006

Home-shoring

Offshoring is a now-common term to describe businesses sending work and jobs to foreign countries. But what's home-shoring? N.C. State University economist Mike Walden explains.

"It's a counter, really, to offshoring. But instead of the company sending jobs again to foreign countries, they actually send them away from their site, but they keep them in this country," says Dr. Walden, a specialist with the North Carolina Cooperative Extension Service.

"And how do they do that? Well, they send the jobs to people's homes. The company benefits by being able to cut down on their overhead and by doing they can more effectively compete with cheaper foreign labor," he adds.

"Many companies have found that home-shoring is actually cheaper than offshoring. And a lot of people like it -- perhaps families with children, one of the spouses wants to stay home, perhaps homeschooling the children or just being there when the children are home from school.

"One of the big downsides, of course, is on the benefits side: Oftentimes these home-shore jobs will not have benefits. But again the worker has to balance that with flexibility and convenience."

March 09, 2006

Textiles versus apparel

While we often talk of textiles and apparel as if they were one industry, Dr. Mike Walden explains why the distinctions between the two are significant. Listen

"Textiles takes raw fiber and non-fiber material and forms them into things like cloth and other fabrics. Apparel then takes that cloth and fabric and specifically manufactures it into clothing. So they're really two ends of the whole process," explains Walden, a professor with N.C. State University's Department of Agricultural and Resource Economics and a specialist with the North Carolina Cooperative Extension Service.

"Now the distinction is important because the apparel industry is much more labor-intensive. Therefore it is much more apt to take advantage of lower-cost labor in foreign countries.

"In comparison, the textile industry is more capital-intensive, more machinery-intensive. So it is more suited for the U.S.

"And, indeed, if you look at the trade deficit, it has exploded for apparel, but it has barely budged over the last few years for textiles."

March 08, 2006

Tobacco's future

Tobacco was king of North Carolina's economy for more than half a century, but it's importance has waned. Dr. Mike Walden, an economist with N.C. State University, considers the industry's future.

"Some are very pessimistic about tobacco's future, but others say actually the industry could revive -- perhaps not to the level it was 40 or 50 years ago but from where it was a couple of years ago," says Walden, a specialist with the North Carolina Cooperative Extension Service.

Why?

"Clearly some reduction in the tobacco industry is due to the reduction in the incidence of smoking, especially domestically," says Walden. "But another big reason was from competition from foreign producers. The tobacco program actually held tobacco prices in the U.S. high -- higher than many buyers could get from foreign producers. Now that that program is gone, tobacco prices in the U.S. can perhaps become much more competitive with foreign producers'.

"And therefore we may see over time a shift from buying of the big cigarette makers to U.S. tobacco. And that could revive some production of tobacco here in North Carolina."

March 07, 2006

Work and leisure

Many people say they are working more than ever and have very little time for fun. But a new study says this isn't true. N.C. State University economist Mike Walden explains the study's findings.

"I think a lot of people will disagree -- but perhaps listen to the explanation here. What the authors do is they define work very broadly -- not just time you spend at your job but time in household chores like cooking, shopping, keeping house, running errands," says Walden, a specialist with the North Carolina Cooperative Extension Service.

"And they say when you look at this comprehensive measure of work -- both work in the job place as well as in the home -- there's been a big drop in total work among Americans over the last 40 years.

"A large reason for this is the advent of modern conveniences at home, as well as the fact that many households now pay to have some household chores [like lawn mowing] done rather than do them themselves.

"So, that said, why might people feel as if they are working more? The authors say there could be two reasons: Number one, your time is more valuable today. And number two: There is so much more for us to do with our time that that may put pressure on us. [And so we ] think, 'Gee, we can never get all these things done.'"

March 06, 2006

The Super Rich

Changes in the overall economy have had an effect on people's salaries. Dr. Mike Walden considers what's happened with those at the upper end of the income scale.

"If we look at the top 1 percent of Americans by income, they now receive 15 percent of all income in the country," says Walden, an economist with the North Carolina Cooperative Extension Service at N.C. State. "This is up from 8 percent 30 and 40 years ago.

"Most of this increase, interestingly, is due to increases in their labor income -- income they earn by working -- not their investment income," he observes.

"But perhaps surprising to some ... you see the same trends in the U.K. and also in Canada," Walden adds. "You don't see, however, these trends toward a large increased income going to the super rich in continental Europe and in Japan.

"So a big question among economists is, 'Why?' One answer -- there are no definitive answers -- but one answer is that in countries like Canada, especially the U.S. and the U.K., there is a more open and less restrictive economy that has allowed greater rewards to go to top managers and executives."

March 03, 2006

Financing the future

"Financing the Future" was the theme of the recent two-day Emerging Issues Forum at N.C. State University. The conference featured such big-name speakers as former U.S. Treasury Secretary Paul H. O'Neill, publisher Steve Forbes, former Virginia governor Mark Warner and New Mexico governor Bill Richardson. What major conclusions did they and other speakers come to? N.C. State University extension economist Mike Walden weighs in.

"Number one: North Carolina's tax structure right now -- at this time in history, given the changing economy -- may need a clear overhaul," says Dr. Walden, "if we to see that system produce the kind of revenue that we need for public needs in the coming years.

"Beyond that there was I think a lot of concern about the tax base: Are we taxing our economy broad enough, again given the changes? A good example is the sales tax," he adds. "Sales tax is primarily a tax on hard goods. It excludes services. [There was a] lot of support in that conference for broadening the base to include services but lowering the rate.

"There were some issues raised with the income tax -- particularly the fact that we have one of the highest marginal tax rates on high income households in the Southeast. Are we detracting some of those people from living here?

"And then lastly I think there was a lot of concern about local governments and the fact that perhaps they
need more flexibility in the kind of taxes they use -- yet to get that flexibility they need that to be given to them by the General Assembly."

March 02, 2006

Do we really have a trade deficit?

The cumulative U.S. trade deficit since 1980 is an astonishing $4.5 trillion. Many have predicted that this deficit will cause the dollar's value to plummet and interest rates to rise. N.C. State University economist Mike Walden explains one theory for why that hasn't yet happened.

"Two Harvard professors have a fairly controversial theory about why this hasn't happened. It's really based on the notion that we are mismeasuring our international position in the financial community," explains Walden, a professor with the Department of Agricultural and Resource Economics and a specialist with the North Carolina Cooperative Extension Service. "Certainly we do have a trade deficit -- no one is denying that. We are importing more than we are exporting.

"But what these professors do is they say, 'Look we also have investments around the world. We have investments in foreign countries; foreigners have investments here. And the U.S. is earning much more on its foreign investments than foreigners are here.'

"And when you take that into account, they argue, that it more than wipes out the trade deficit and in fact leaves the U.S. as a creditor nation -- not a debtor nation. And they argue that's why we haven't seen a big fall in the dollar and an increase in interest rates."

March 01, 2006

A 21st century tax system

The recent Emerging Issues Forum at N.C. State University addressed the topic "Financing the Future." Dr. Mike Walden says the forum addressed whether North Carolina, at the local and state levels, have the tax system that is going to provide needed public revenues in the future.

"I think there were three essential questions," says Walden, a professor in the university's Department of Agricultural and Resource Economics. "In this current century, the 21st century, are we taxing the right kinds -- the right economic bases? That's question number one.

"Number two: What kind of tax rates should we have? Do we want, for example, a tax system that has low tax rates but taxes a lot of things -- or a tax system of high rates that excludes a lot of things from taxation?

"And then, thirdly, do we want to use the tax system only to raise revenue? Or do we want to use it to achieve other kinds of goals in our economy?"